Loan syndication is a lending process in which a group of lenders provide funds to a single borrower.

Working Mechanism
When a project is unusually large or complex, it may exceed the capacity of a single lender. For example, the amount of the loan may be too large, the risks too high, the collateral may be in different locations, or the uses of capital may require special expertise to understand and manage it. In these cases, a financial institution may bring other lenders into the deal. Usually, the loan syndication limits the liability of each lender to its share of the loan interest. In this way, each lender limits its loan amount to a manageable size, and limits its risk exposure. Additionally, each lender may have a collateral interest in a unique or specialized asset from the borrower, such as a piece of equipment. Loan syndications involve a large amount of coordination and negotiation. Typically, loan syndications involve a lead financial institution, or syndicate agent, which organizes and administers the transaction, including repayments, fees, reporting and compliance, and loan monitoring. Often, such transactions require the services of a specialist who syndicates the loan on behalf of the borrower; identifying lenders while negotiating terms and conditions, and even representing the borrower throughout disbursements. Loan syndication fees can be expensive, ranging from 5% to 10% of the loan principal.

Why It Matters:
Loan syndications can be a useful tool for banks to maintain a balanced portfolio of loan assets among a variety of industries. If one loan is too large, it may overweight the bank's portfolio. Therefore, banks may pursue a syndication to accommodate a loan and keep its portfolio in balance. At the same time, loan syndications may incur a large expense to the borrower. While the syndication fee is usually financed, the burden of repaying the loan and Stages Involved in the Process

Premandate Phase: The prospective borrower may liaise with a single bank or it may invite competitive bids from a number of banks. The lead bank identifies the needs of the borrower, designs an appropriate loan structure, develops a persuasive credit proposal, and obtains internal approval. The mandate is created. The documentation is created with the help of specialist lawyers.

Placing the Loan: The lead bank can start to sell the loan in the market place. The lead bank needs to prepare an information memorandum, term sheet, and legal documentation and approach selected banks and invite participation. The lead manager carries out the negotiations

and controversies are ironed out. The syndication deal is closed, including signing of the mandate.

Post Closure Phase: The agent now handles the day-to-day running of the loan syndication fee is shouldered ultimately by the borrower.

Benefits of Loan Syndicatiors for Borrowers Syndicated loans provide borrowers with a more complete menu of financing options. In effect, the syndication market completes a continuum between traditional private bilateral bank loans and publicly traded bond markets. This has resulted in a more competitive corporate finance market, which has permitted issuers to achieve more market-oriented and cost-effective financing.

Examples: A recent example has been the Rs. 1,300 crore loan syndication of Hutch done by ABN Amro, HSBC and Standard Chartered for three years. The issue was underwritten by the three banks equally and was thrown open for book building. It was pitched at a rate of 7.10%. However, on the back of demand from banks, the interest rate was brought down to 7%. It was distributed among 10 banks.

Hindalco raised around Rs. 6,000 crores, which was lead-managed by IDBI Bank. The loan has tenure of 10 years with a reset after five years. It was priced at 5-year G Sec plus 65 bps. Thirty banks participated in the issue.

The largest syndication deal in the market currently is Reliance Ports at around Rs. 4,200 crores. There are also two deals in the pharmaceutical sector for Rs. 1,000 crores each, and two in the telecom sector for above Rs. 1,000 crores. Also, Delhi-based DLF is looking at raising Rs. 1,000 crores for 10 years. In India, most corporates in the market are looking at raising money for Greenfield projects.

The Housing Development Finance Corporation (HDFC) has signed a loan agreement for $200 million with International Finance Corporation (IFC), the private sector development arm of the World Bank group. The loan would be available to HDFC in two tranche - the first part of $100 million to be lent directly by IFC as a multilateral tranche, and the second part as a syndicated tranche, said a news release from the housing finance company. The first tranche has bullet maturity at the end of 8 years, the rate of interest being six-month LIBOR plus 100 basis points. The second tranche would be syndicated by IFC and would be placed with leading international banks.

The main objective of the loan was broad-basing the medium-to-long-term funding sources for HDFC and also to reduce the overall cost of funding. The proceeds of the loan will be utilized for lending to individuals across the country for residential housing. HDFC is in the process of finalising suitable risk management arrangements to hedge against foreign exchange fluctuations.

Disadvantages Managing multiple bank relationships is no small feat. Each bank needs to come to an understanding of the business and how its financial activities are conducted. A comfort level must be established on both sides of the transaction, which requires time and effort. Negotiating a document with one bank can take days. To negotiate documents with four to five banks separately is a time-consuming, inefficient task. Staggered maturities must be monitored and orchestrated. Moreover, multiple lines require an inter-creditor agreement among the banks, which takes additional time to negotiate.

Conclusion One advantage of syndication loans is that this market allows the borrower to access from a diverse group of financial institutions. In general, borrowers can raise funds more cheaply in the syndicated loan market than by borrowing the same amount of money through a series of bilateral loans. This cost saving increases as the amount required rises.